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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
So here's the latest this morning.
The future of the Federal Reserve in focus as investors anticipated policy changes once former Fed Governor Kevin Walsh returns to the Central Bank, joining us now to discusses. Mark Short, the former chief of staff, the former Vice president, Mike Pence, Mike, welcome back to the program. Let's go through some of the details and some of the endorsements we've had over the past few days. Geta Gopinath, Mohammad Dalerian, the prim Mistry of Canada, Mark Carney, and the list goes on
and on and on. Is Kevin Walsh a pretty conventional Republican pick to lead the Federal Reserve.
Look, I think he is He's somebody who's been on the Reserve before, and I think that of the options, it's a pretty strong pick for the president. I know there's some people who question, you know, what these hearings are going to be like when he gets there because of positions he took against quantitative easying after the financial crisis and reconciling that with a very dubbish approach. Now.
But look, if the Senate can confirm Tulsa Gavard and he and I and Christy Noman at DHS, I don't think it's going to be much of a challenge for them to confirm Kevin Warsh here to the Fed.
Mark, you were in the room in Trump won when the debate was going on who Trump was going to pick, and he ultimately landed on Minuchin's pick of j Powell, which I know was not VP Mike Pence's choice. What do you think went behind this process why Kevin Walsh was picked and not the other Kevin.
Well, Look, I think there were basically three finalists in the last go round. There's Jay Powell, there was Kevin Warrish and there's John Taylor, and I think that there were different camps aligned with each But the reality is that Steve Manuchin made the appeal to the president. Then when the President asked, he said who's going to keep rates lower? And Mnuchin was clear and saying it would be Jay Powell. And I think that's what the President was looking for. It was less of a question about
sound monetary policy. It was a question of who's going to push for lower rates. And I mean there's an irony, of course now that the President is upset with j Powell for not having rates lower, But I have to believe that there's been you know, that same conversation is repeated itself this go round, and I think there's probably been assurances that wars is going to adopt the doublest approach here.
But that's why it's so precarious, given the fact that when he was at the FED, he actually was calling for a hawkish, tighter monetary policy.
Do you think his views have truly.
Evolved or is he trying to be politically correct in the moment.
To get a job.
And I don't know that I can put myself in the issues and know that I think that I do you think he has certainly the credentials here? Again, as I said, of the options, I think there's probably a lot of comfort on the street and comfort in the Senate that this is where the president landed and he's gone. He is going to have to address the apparent change in position from where he was after the financial crisis
to where he is today. But nonetheless, I think that he's going to have a term that's going to extend far beyond President Trump's term, and so he perhaps is playing a long game here too.
Mark, I'd love your take on what we heard from Tom Tillis, the North Carolina Senator who seems to not care at all since he's not running for reelection and it is going to block the process until the DOJ lawsuit or complaint against the FED is lifted. Do you think that he has more popular support among sitting Republicans than he did maybe a couple of weeks ago, not just with this, but in general.
He probably does.
I think there are others who were applauding some of the positions he's taking, but feel they can't take the same because they'd be concerned about their own reelection options. But you know, I think that as it comes to you know, he's going to block this until the investigation is concluded.
On Trump Powell.
I think most people assume the investigation Droom Powell is less on the merits and more in effort to pressure the Fed to lower rates. And so at the end of the day, is the White House going to say we're going to continue investigation 're going to say, hey, we've got our own guy now to run the Fed,
so let's pull back on the investigation. It seems like at the end of the day, it seems to me that this is not something that's going to continue in the next year, as potentially the President suggested, you know, on Air Force One the other night.
It seems to me.
They'll they'll definitely be in a desire to pull back on the investigation to allow this to move forward.
I guess I was getting at something bigger, especially because we are in midterm year where we're going to be getting a government shutdown evidently every two weeks. And I'm just wondering, Mark, going forward, at what point you start to see Republicans look at either distancing themselves from President Trump's policies. Are you seeing any groundsful of the especially after the special election in Texas after the midterm outcomes.
Are you seeing anything like that or.
Is it sort of a case by case situation.
I think it's more case by case, but I think it's going to continue to ramp up, I would say, over the course of the year.
And it's not just taxes.
I mean, there's been a series of special elections in deep red states of Mississippi and Georgia in which Republicans have been defeated, and so there's clearly a trend building at this point, and there's no doubt that other Senate
Republicans are recognizing that. However, they also know that the president has enormous way over the base and particularly in primaries, and so I would look to see more Republican centers distance themselves after you get through primary season, but being reluctant to do so until they've secured their notation and
then that's that's behind them. So yeah, till Us is a different position, don't I don't anticipate you can see too much more of that in the short term, but perhaps you know, toward the summer months, I think his members look toward the general election in November, and they're behind their primaries. That's when you begin to see more members begin did perhaps take positions similar.
To Tillis Mark.
On a final note on Kevin Warsh, the President spoke at a dinner over the weekend. I'm reading a quote Washington Post. Had someone in the room actually said to me, all of this is accurate.
Quote.
If he doesn't lower interest rates, I'm suing his ass off. And then the President says, I'm kidding.
Mark.
Do you think he's actually kidding or is Kevin Warsh potentially going to face the same fate as Jay Powe if he doesn't lower interest rates.
Well, I think he would face the same fate if he didn't lower interest rates. But again, I think this process has played off for a while. It's pretty hard for me to see that the President would not have moved forward this nomination as he had pretty strong assurances that the Warsh was looking to lower rates when he got there, and so so yeah, I think he would. If he didn't, I think he would face.
This pressure from the president.
I think for president somebody who likes lower rates for lots of reasons. He made his resources in real estate. The president believes that it's better for exporting and for a manufacturing base if the dollar is depreciated, and I think he knows the impact on equity markets when rates are lower, and so I think he wants to continue to push for that agenda regardless of who the personnel are inside the FED.
Stay with us more Bloomberg Surveillance coming up after this. Andrew Honjost of City says this the employment data is unlikely to maturely change the outlet for the labor market. We expect a solid one thirty five added in January and the unemployment rate remaining unchanged at four point four percent. Andrew, that puts you at the top end of the estimates for this coming Friday.
Walk us through why.
You're looking for that, but also looking for seventy five basis points have counts through the year.
Yeah, top end of the estimates in terms of where that payrolls numbers.
Are going to be.
But it goes back to what so as talking about, what you're all talking about, which is what does this data really tell us about what's going on in the labor market.
So we know we have these issues with the birth death model. I would actually.
Agree with Steve Englander that if we get a big update to that birth death model, you could get a zero or negative number, and I think that's where the underlying pace of job growth is running somewhere right around zero. And that's what we had Governor Waller talking about in his descent from the Fed staying on hold last week.
So it's a complex.
Job market is a complicated situation and complicated data. But I would go back to that survey that the Conference Board puts out and they just ask people do you think jobs are plentiful or do you think jobs are hard to get? And month after month people are telling us jobs are becoming harder and harder to get. So I think it is a loosening labor market. Lots of statistical issues. Residual seasonality used to be something people would look at me very funny when I said, Now people are all.
Familiar with it.
Every year we get stronger jobs data at this time of year, building that into our forecast.
That's why we have one hundred thirty five.
What do you think, Braakie, what's the break even? Right?
I think the break even rate with the way that the data are adjusted now, it seems like we can run about fifty thousand jobs per month and fifty thousand jobs per month as reported by payrolls is leading the unemployment rate to stay stable where it is, But there is a question about that fifty thousand should be subtracting something like sixty thousand from it because those payrolls numbers keeping overstated. We'll get more information about that today or
on Friday when we get the new report. So that break even has slowed down. But again, I think the key thing here is do we call a job market strong if we have essentially zero increase in labor supply and zero hiring. I don't think that's a strong job labor market.
Can you have a strong economy though, if you don't have a strong labor market. I mean this has been sort of a feature of the entire market for a while. The labor market has been sluggish at best, and yet the economy has continued to grow pretty dramatically. So at what point does that become a hamper potentially to any kind of their acceleration.
Yeah, I think eventually it does.
Mean there's growth, and then there's whether it's broad based growth or fairly focused growth. And to the extent that we're getting growth from things that are AI related software and data centers. A lot of those kinds of areas of investment spending don't actually generate a lot of new jobs, and so that eventually becomes an issue for the economy. In the short term, you run strong growth and you can have weaker labor market. I think that's what we're
seeing right now. But eventually people don't have the wage income to purchase. And if you look at consumer spending, it's holding up, but it's holding up because the savings rate keeps going down. People are saving less and less because their incomes aren't tracking with that consumption.
So eventually it's an issue for the economy.
You still think that.
The FED is on track to cut by seventy five basis points this year, even with Kevin worsh potentially being the FED share Why not more given some of the proclamations that we've heard from certainly President Trump as well as Kevin Walsh, and considering the weakness that you see in the labor market, I think.
The risks are that we do end up with more cuts than seventy five basis points rather than less cuts than seventy five basis points. The reason I think seventy five makes sense as a base case is although the labor market is softening and loosening, it's happening very gradually.
So if we just project out that gradual loosening of the labor market, the unemployment rate will move up just a bit this year, Inflation will come down a bit this year, and that would mean that the Fed should just ease policy rates by a bit this year back to something closer to neutral, which fifty seventy five basis points lower be neutral.
I think that should be the base case.
The market has about fifty I have about seventy five.
But what's the risk.
The risk is that when you're in an environment where hiring is so weak, if there's any pickup in layoffs, that unemployment rate is going to shoot up and then we'll get more cuts.
Well, you haven't changed your expectation even though we have a new nomination for the FED. So do you think Kevin Walsh is going to be data dependent?
Given what you're.
Basing this off?
Is the data that you expect to come out?
It's I mean, it's not just Kevin Warsh And I think that's an important point that it's the committee as a whole.
That committee has been data dependent.
I do expect Kevin Warsh as an individual to be data dependent as well, So depending on where that inflation data comes in in the second half, and I think that's really important and probably underemphasized. A lot of focus on the labor market right now, and that's appropriate, But those inflation numbers, I think by the second half are going to look closer to two percent inflation. And that's not just going to give Kevin Warreh's ability to cut
interest rates. I think that will give a lot of members of the committee the confidence that they can bring right slower.
What's the source of that? What's driving us back to two.
Shelter cooling is where we have the most confidence. I think a lot of economists have that in their forecast. Now we just have so many indicators. It's a soft housing sector. The housing sector is soft right now. Prices are soft, rents are soft. But this loosening labor market should also give us confidence that inflation will come down further.
And then finally, that.
Tariff boost that we think is about fifty basis points in CPI and PCE right now, that should be dissipating by this.
So let's just cover the shouts of story, because when people like you you explain the shout story, it sounds so intuitive, it sounds like common sense.
Okay, you've put it that way.
I can see where it's going to be several months out in the official data. Why do Federal Reserve officials not share the confidence you have about the disinflatory tail winds that are already coming down the pipeline.
I think there's a difference between different Fed officials, and different officials will be different places on this where I am and maybe some of the more dubbish officials are saying, yeah, we basically can forecast this thing six months to a year in advance.
We know that it's going to cool down.
I think there are other Fed officials that maybe also kind of know that we can forecast that, but think that the way they should behave is if we can, because they think it's important to take a strong stand against inflation.
You see three percent right.
Now, and they think we're supposed to react to that three percent, not the forecast of where we're going. I react to the forecast, I think other Fed officials do. I think that's a difference of opinion in terms of how you conduct monetary policy.
So in other words, this is about appearances. This is about appearing hard on inflation, even if they'll come down on the same side as the doves. In other words, do you agree with Kevin Walsh that people should just talk less and not really give forward guns.
I think well, I do think forward guidance is We're probably overly used to forward guidance because we were in these strange scenarios where you had to give guidance about keeping policy rates at the lower bound for a long period of time. So we should be moving away from that. In terms of this, you know, is it kind of you know, optics talking about inflation. It's hard to make an argument that three percent inflation is a lot worse
for the economy than two percent inflation. The target is two percent, so there is an optics reason that you want to be at two percent.
If central banks were to do it over.
Again, I think most economists would say, probably we should have had a range of inflation that would have been acceptable. So I do think it's a lot about optics right now.
This is fascinating, especially because the person who is likely to come into be the next FED chair is an inflation hawk at least traditionally more than a decade ago, and people are saying people.
Can change in that time.
Do you think that he is also potentially going to accept three percent is a new two percent, to be more dubvish in the approach because it hasn't been a problem, and frankly, if people were to come back, that might be the more appropriate target.
Yeah.
I'm not suggesting, and I don't think that Kevin Warsh is going to say that three percent should be the new two percent, that we should be changing the target right now and we've just overshot for multiple years. But I do think this idea that we can't be hyper sensitive to his inflation off by a tenth of a
percentage point here or there. I think the more you kind of immerse yourself in this data and understand what the data are and all the issues and producing it and the different choices that we make, it's hard to get really excited about being off by a few basis points. So I'd like to see the move in that direction. Then possibly they will.
To your point, though, Manjow, I think there's a realization on the committee that they can shank the events they influence, and they can basically sit here and say, you know what, we can shank the events we anticipate by saying things like I'm not worried about inflation could actually contribute to inflation. Is that ultimately what you get and gain?
Yeah?
I think that that's exactly the concern. The reason I would be less concerned about that now is because we have all of these indications that we're not in an environment where we have a bunch of upside around inflation. And it is actually the opposite of where we were when FED officials were saying they weren't that concerned about inflation when everything was supposed to be transferred.
We had a tight.
Labor market, we had wages that were accelerating, prices that were accelerating all over the place. All of those things are decelerating now, So I think you can be a lot more confident that we're going to get inflation lower.
Stay with us, mulplinbeg Savanna's coming up off to this.
Join us Natsky City. The conversation Henrita triced upon us. Henriettes are welcome. Can we find an off rampay?
I think we can find an off ramp.
For now, we have until Tuesday, As the Speaker suggested, I'm not going to try to move things forward tonight around four or five six o'clock, I would say for investors, and you brought up the BLS data, that's huge. There's also the IRS funding that lapses, and it's tax filing season now. But when I travel around and talk to investors, one of the questions I get a lot is what's happening with the President's two thousand dollars rebate check?
Are we going to get that for the tariffs?
And I would encourage folks to think about the fact that we just ate all of January up on this conversation. It fell apart of the last minute, and now we need to spend all of February basically dealing with the same government funding bills and then a DHS package, and then while the State of the Union, it's basically already
March and it's only February second. So for the investment community, it's really focused on what will not get done because we're not doing this, We're not getting a second reconciliation bill, we're not getting movement on other items that the President talks about quite a lot.
Well, it seems like Leader Chuck Schumer, Senator from New York, cut a deal at the White House, but it doesn't seem like Minority Leader Jakeem Jeffries in the House was privy to that. How big of a gap right now is it between the Senate leaders for the Democratic and the House leader from the Democratic Party.
Yeah, there definitely is a gap, and you can tell because there's not a vote for the rule. As Speaker Johnson laid out, I think the disconnect between Jeffries and Schumer is unfortunate.
It will ultimately be bridged.
You saw the guys right behind Jeffries, Jim Cliburn and Standi Hoyer saying that they're going to provide the votes for this package and encouraging their members to vote yes.
So I think a lot of this also is to do with what we.
Went through back in the original shutdown, which is really propping up potential Speaker Jeffries in advance of the next interm election cycle, giving him an opportunity to really stake the ground, get more recognition leadership from the conference on the House side. And I think that's what this is really functionally about.
Okay, so Speaker Johnson can find the two hundred and eighteen votes and we get back to the government operating as normal, and we get the BLS data on Friday. They still need to figure out the DHS funding. They're going to have two weeks to do that. Do you see a deal for that new bill potentially that has to be drafted.
Man, I mean, they don't even agree on whether or not I should be wearing masks or have name ideas. You know, in the weak of the shooting in Minnesota, that was just a really immediate thing that Democrats gravitated to. I think you see it out in the ether as well. If you talk to folks in Minnesota or anywhere else in the world where ice has been inserted into these cities, they talk about the masks, and they talk about IDs
a lot, and video cameras as well. Getting early messages that Speaker Johnson's not going to agree to those three components suggests that we're in for a very rocky ride of the next two weeks. I'd be shocked if we were able to pull it off without having this bleed into you another two weeks.
Henry, I have to say none of us I'd excited about talking about a government shutdown pretty much. You can just feel the pall of exhausted and fall over the conversation as soon as you say the two words government shutdown.
I just wonder if.
We're moving to a phase we can stop this kind of pinata or the sort of this kicking the can down the road.
We're always talking about this.
Maybe it's two weeks, maybe it's one month, maybe it's two months. Are we going to get out of this or is this the path of travel for the foreseeable future.
I think welcome to a interim election year. Look at some of the special elections that just took place. There's one in Texas where the swing was thirty one points away from Donald Trump. And I think what Democrats learned in October is that as long as they can steer the message, they're winning elections. So I don't see a
reason why this would necessarily stop. The goodness for investors is that once we get BLS donal with, it will be done with all the way through September thirtieth, So we could talk about DHS, but it won't necessarily be you know, hey, what we get the employment report? Hey, is the IRS going to be able to process refund checks and investors can sort of tune out a little bit the immigration narrative in an election year.
I mean, come on, that's that's the tale as old as time.
Now.
There's a sense also that maybe President Trump is looking for more concessions when it comes to not just getting the budget through, but also getting his new FED chair picked through, and there is a potential for or maybe the lawsuit to be dropped against fedcher J. Powell about the renovations. I'm just wondering how realistic you see that process in being stymide, whether you do see a potential path to get Kevin Warrish as the FED chair by may.
You know, I've been working with Senator Tillis's staff for a really long time now.
They have very high conviction.
I do not think he is messing around When he says I want this case drops and it will block all other nominees and all other considerations at the FED, you should take that very seriously. So he's going to need to get that concern addressed. We have many months before we actually need to replace Ja Powell, and they're going to probably take all of those months.
The President will have to capitulate.
We saw the market's respond sufficiently to give him a message that he needs to drop this lawsuit. Jay Powell delivered a very forceful rebuttal to that in real time, as we all saw from that video. I would take that incredibly seriously. I don't think Speaker Senator Tillis is going to get rolled on this in any way, shape or form. He's just getting louder if anything else. I think they will need.
To address that. It'll probably take some time.
And he made that point when he joined us on Friday Henrietta. But once the DOJ investigation does get wrapped up, and once likely Kevin worsh gets through his Senate Banking Committee, how does he play on the floor. Do you think Democrats vote for him as FED chair?
I think so.
I think you'll have a lot of aisle crossing. I think that is generally the direction of travel here. With this particular nominee, you probably would have seen much fewer votes, maybe even a fifty to fifty split on a Kevin.
Hassett, for example.
But judging by the temperature of what I picked up this weekend from staff on the Democratic side, there are going to be some lingering questions. There's a lot of random stuff in there. But as somebody who's already been in a similar position, has already gone through these approval processes, I think that he's on a path to getting back person support.
Right in two thousand and sixty, he had a voice vote and he pretty much sailed through unanimously to join the FED. And Henriette, I just wanted to end on this point because you sort of mentioned it earlier, what went on in Texas over the weekend. I know it's just a state a state Senate seat, but how this Democrat won in a plus seventeen Trump district when he was outspent and outraised money wise. Is this a harbinger do you think for the midterm? So is this just a special election?
It is a special election, but those the midterm cycle and this pre pre mid term that we're in right now, we've been in since November, is highly predictive of electoral outcomes. And one of the things that I've been concerned about for Republicans all year is their effort to redistrict.
Redistricting is all.
Fine and well, you do not do that in a waveyear because Dems have already wiped away the potential advantage. I think it's one seat here or there that you might see any kind of plus up versus what was happening when we started this year.
Now you're looking at a wave election.
They've diluted their districts so they're not solid red anymore. They tried to eat into some of the blue spots. You're getting a plus thirty one in the DEM favor trajectory in a state seat in Texas.
You got a problem.
So the primaries I think are really fascinating to watch right now, between Cornyn and Paxton, for example, how that's going to play out and what it's setting up for the general I think is going to be really exciting for anybody who cares about elections to watch.
Those are big swings we're talking about.
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